TCFD’s Final Report Before Handover

    Stockholm (NordSIP) – The International Financial Reporting Standards Foundation (IFRS) will take over the monitoring responsibilities of the Task Force on Climate-related Financial Disclosures (TCFD) from 2024.  In the meantime, the Financial Stability Board (FSB)-appointed task force has released its final annual status report.  It provides an overview of the TCFD’s success in establishing a standard climate-related financial disclosure framework across the globe since the publication of its final recommendations in 2017.

    Among its key successes, the TCFD points to the integration of its recommendations within reporting frameworks developed by governments and regulators around the world including the U.S. Securities and Exchange Commission (SEC), the U.K. Parliament, the European Commission, and the International Sustainability Standards Board (ISSB) overseen by the IFRS.  As the TCFD report notes, the SEC, the European Securities and Markets Authority (ESMA) and other supervisory bodies are increasingly moving towards requiring climate-related information to be included in companies’ financial statements.

    The TCFD recommends 11 disclosures across 4 categories of information:

    Governance: Board Oversight, Management’s Role.

    Strategy: Risks and Opportunities, Impact on Organisation, Resilience of Strategy.

    Risk Management: Risk ID and Assessment Processes, Risk Management Processes, Integration into Overall Risk Management.

    Metrics and Targets: Climate-Related Metrics, Scope 1,2,3 GHG Emissions, Climate-Related Targets.

    In terms of coverage, the TCFD reports steady progress but there remain large discrepancies depending on the industry sector or geographical location of the company in question.  Over the fiscal year 2022, 58% of companies reported on at least 5 of the 11 recommended disclosure categories, up from only 18% in 2020.  More disappointingly, just 4% reported on all 11 recommended disclosures.  The greatest improvement in reporting levels was seen in climate-related risks or opportunities, board oversight, and climate-related targets.  According to the TCFD, while greater disclosures are a positive step, most companies are including these within sustainability or annual reports rather than as an integral part of their financial filings.  This goes against the ultimate aims of most supervisory bodies.

    Within the asset management industry, 80% of the largest managers and 50% of the largest asset owners reported on at least one of the 11 recommended disclosures, with levels of 70% and 36% respectively for those reporting on at least 5 of the categories.  The feedback from the asset management industry focuses on the difficulty of obtaining the requisite information from investee companies, with asset owners facing particular challenges with unlisted companies.

    The level of disclosure by industry reveals the growing pressure on high-emitting sectors, with the energy and materials and building sectors providing the highest average numbers of disclosures per company with 6.3 and 5.8 respectively.  At the other end of the scale, technology and media companies only average 3.7 disclosures per company.  The regional picture shows European companies leading the way with 7.2 disclosures on average, with Asia Pacific and North American companies on 5 and 4.6 respectively.  There is still evidently much work to be done to establish TCFD recommendations in the developing world.  In certain areas North American companies also have much room to catch up, with just 35% of them reporting on climate-related metrics versus 78% in Europe and 49% in the Asia Pacific region.  TCFD would also like to see urgent progress across all regions and sectors in terms of scenario-based reporting on resilience.

    Looking ahead, the TCFD highlights key areas for improvement.  These include interoperability across global jurisdictions, further developing implementation guidance, supporting the spread of climate scenario analysis, expanding disclosure to include other sustainability topics, and working with sovereign entities to bring them into the TCFD-aligned fold.

    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.

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